Effects of regulation on hedge funds not onerous

June 29, 2010 | By Jim Kim

So how will the historic financial reform effort treat hedge funds? It's fair to say that the industry is almost in celebration mode. The so-called regulatory effort so far treats hedge funds (hedge fund news) lightly. True, they will have to register, but that's hardly a big deal anymore. More importantly, they were spared new taxes on carried interest, which could have dealt a draconian blow to all alternative investment provides. (That issue, however, is not necessarily dead. It might be revived later.)

It looks like too-big-to-fail Wall Street firms will not have to divest their hedge funds after all. They can continue to invest up to 3 percent of their Tier 1 capital in alternatives. This, in some cases, actually gives them an excuse as to why they have so little skin in the game.

For one big firm, however, this isn't great news at all. They wanted skin in the game. Goldman Sachs (NYSE: GS) had $15.5 billion invested in its own funds, including private equity and hedge funds. According to Reuters, that was 23 percent of its $68.5 billion in Tier 1 capital at the end of the first quarter. Under the new rule, with that amount of capital, Goldman could invest only about $2.1 billion in those types of portfolios.

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